I first set foot on African soil in early 1998 when I took over charge of a commercial bank in East Africa. It was privately owned. Its chairman, who was also its major shareholder, was an industrialist –the second-largest plastic goods manufacturer in East Africa. He was a Kenyan citizen of Indian origin, a Gujarati whose parents had migrated to Kenya before he was born. There were about one hundred thousand people from the Indian sub-continent, known as Asians, who had made Kenya their home and contributed significantly to the economy of the region. As is usual for Asian-owned banks, it had major exposure to the local Asian community in terms of its general business mix, particularly its lending portfolio. The bank, small in size, was well-regarded in Kenya.

The chairman was an entrepreneur at heart. He had built up his plastic business from scratch. He was similarly determined to build up his banking venture. He was closely involved with both, and split his daily routine to make sure that he was involved in the decisions taken at his factory as well as at his banking set up. As part of his routine, he held two meetings a week at the bank. Present at these meetings were two of his local directors (partners in his plastic company), and the bank’s top management, i.e. my general manager and myself. At these meetings all papers and decisions taken by us were reviewed by him. He also spent the first half of every working day at the bank – overseeing operations and meeting the bank’s customers. The Central Bank of Kenya did not approve of his style of functioning, but one just couldn’t keep him away from his bank.

At one of these regular meetings the issue taken up for discussion was the penal rate of interest lately imposed by the bank on the defaulting borrowers. The chairman said that several of his customers (read, his friends and peers in the Asian community) had complained to him that the (penal) interest rates were too high; they hurt, and that the bank should do something about them. On behalf of the bank I explained that the penal rates were meant to be punitive – much higher than the normal rates. They were meant to act as deterrents or disincentives to potential defaulters, to keep their numbers as low as possible and thus improve the overall quality of the bank’s loan portfolio. The main objective of a penal interest was not to increase the bank’s income, but to impose financial discipline on the borrowers.

The chairman had another issue to discuss. He said that some customers had to resort to frequent overdrawing of accounts, but were inconvenienced since they had to approach the bank every time they needed to draw beyond their sanctioned limits. He suggested that the bank should sanction 25 to 30 per cent over and beyond the quantum estimated after appraisal, to avoid frequent reporting to the Central Bank of Kenya, and inconvenience to his customers (not necessarily in that order!). While on the subject, he also made it known that he did not appreciate the bank (read, us) requesting the borrowers to visit the bank to execute loan documents. Why couldn’t we, by way of customer service, visit their offices instead at their convenience to execute security documents? Could we also be extremely polite while writing letters to defaulters, non-performing borrowal account holders, or even while calling up bad loans, so that the bank did not hurt their sensibilities?

The issue uppermost in his mind was the fact that his peers were unhappy with him and his bank. They had complained to him at social gatherings that his bank was severely penalising them for occasionally stepping over the line, for frequent irregular drawings, or for failing to repay on schedule. The chairman strongly felt that such irregularities were normal to every business. A bank (especially a bank owned by a fellow Asian) was supposed to be ‘understanding’, rather than exploit these situations to inconvenience or penalise the borrowers to increase profit. As the owner of the bank, he was in a position to lend a helping hand, offer financial assistance, to the fellow members of his community; which he always did. However, by treating his peers as it did, the bank was effectively undermining his position. In being strict, he felt that the bank was letting him down, badly.

It was not very difficult to understand where he came from. His plastic manufacturing company enjoyed large financial facilities from other banks in Nairobi. As a customer, especially as a borrower, he knew exactly where the shoe pinched. Unfortunately, even as the chairman of the bank, he continued to wear the hat of a bank’s customer/borrower. For him, the Chinese wall between his profession as an industrialist and as the owner of a bank did not exist. It was well nigh impossible for him, therefore, to step into the shoes of a banker or think like one. Consequently, he did not realise as the chairman of the bank where his loyalty should lie.  

If it is difficult for an industrialist to think like a banker just because he happened to own a bank, it could be even more difficult for the ‘regulated’ to wear the hat of a ‘regulator’, for the poacher to become the game-keeper. For them, the so-called Chinese wall may never exist.  

The lines, unfortunately, are blurred in the US. There, the business lobby has a huge influence on the government and its members. Being a lobbyist is a well-recognised profession. Those who are major contributors to the campaign or election funds of politicians (it is perfectly legal) bring to bear significant influence on the legislations by the US law makers. Cross-functional mobility is easy. Lucrative assignments with attractive compensation packages await some of those who leave the government. Under such circumstances, it is debatable whether one can totally switch loyalties, effect a completely change over – body and soul – to being a regulator from one who earlier was one among the ‘regulated’.  

It would serve no purpose listing the movers and shakers in the US financial markets who later occupied positions of influence in the US government, or those who left the positions of influence in government to join private enterprise for handsome gains. We focus here only on one such who is widely believed to have made a major contribution to the 2008 global financial crisis. His name is Phil Gramm, a Republican from Texas and a Ph. D in economics. Before he entered politics in 1970, he taught at Texas A & M University.

“Some people look at sub-prime lending and see evil. I look at sub-prime lending and I see the American dream in action,” he famously said.  

He was the chairman of the Senate Banking Committee from 1995 through 2000. His seat on the Senate banking committee quickly won him support from the nation’s major financial institutions. Many of his deregulation efforts were backed by the Clinton administration. Other members of Congress — who collectively received hundreds of millions of dollars in campaign contributions from financial industry donors over the last decade — also played their respective roles. From 1989 to 2002, the US federal records show, he was the top recipient of campaign contributions from commercial banks and in the top five for donations from Wall Street. He and his staff often appeared at industry-sponsored speaking events around the country. Everything legal and above-board, of course.

But, where did his loyalties really lie? After going through the rest of this article, if you begin to wonder whether lunatics should run the asylum, you have my sympathies. The details of his zealous performance are now in the public domain. Here is a snapshot, for you be the judge.

From 1999 to 2001, while the US Congress considered steps to curb predatory loans, Phil Gramm did everything he could to block the measures. In 2000, he refused to have his banking committee consider the proposals, an intervention hailed by the National Association of Mortgage Brokers as a “huge, huge step for us.” A year later, he objected again when Democrats tried to stop lenders from being able to pursue claims in bankruptcy court against borrowers who had defaulted on predatory loans.

He played a leading role in writing and pushing through Congress the 1999 repeal of the Glass-Steagall Act. Called The Gramm-Leach-Bliley Act, the measure was the most significant financial services legislation since the Great Depression. It removed barriers between commercial and investment banks that had been instituted to reduce the risk of economic catastrophes. The Act split up regulatory supervision of conglomerates among government agencies. The Securities and Exchange Commission, for example, would oversee the brokerage arm of a company; bank regulators would supervise its banking operation; state insurance commissioners would examine the insurance business. But no single agency would have authority over the operations of the corporate in its entirety. Neither was there any attention given to how these regulators were to interact with one another. The single biggest failure of the system was that nobody looked at the holes of the regulatory structure. Gramm thereby created what Wall Street analysts now refer to as the “shadow banking system,” an industry that operated outside any government oversight.

A year later, the U.S. Senate rushed to pass the 11,000-page government reauthorization bill. Gramm slipped into it a 262-page amendment. In what one legal textbook would later call ‘a stunning departure from normal legislative practice,’ the Senate, at the urging of Texas Senator Phil Gramm, tacked on a complex, 262-page amendment called the Commodity Futures Modernization Act of 2000 (CFMA). Into this Act, Phil Gramm inserted a key provision that forbade federal agencies to regulate the financial derivatives, and exempted over-the-counter derivatives such as credit-default swaps from regulation by the Commodity Futures Trading Commission (CFTC). His proclaimed objective was to "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."  

Holiday season was approaching. Everybody was in a hurry to wind up proceedings. No one had the time or the patience to go through the last-minute additions and amendments. The bill along with the Gramm amendments were passed without much debate.  

The legislation created what was later named as the "Enron loophole". It contained a provision – lobbied for by Enron – that exempted energy trading from regulatory oversight. It allowed Enron – a generous contributor to Gramm election fund – to run rampant, wreck the California electricity market, and ultimately cost consumers and shareholders billions before it collapsed. But for Phil Gramm, Enron was a family affair. Eight years earlier, his wife, Wendy Gramm, as CFTC chairwoman, had pushed through a rule excluding Enron's energy futures contracts from government oversight. Wendy later joined Enron’s board, and in the following years her Enron salary and stock income brought between $915,000 and $1.8 million into the Gramm household. Incidentally, Enron’s CEO Ken Lay chaired Gramm's 1992 re-election campaign.

In 2002, Mr. Gramm left Congress, joining UBS (Union Bank of Switzerland) as a senior investment banker and head of the company’s lobbying operation. UBS had been able to acquire investment house PaineWebber due to his banking deregulation bill. At UBS, he was helping persuade lawmakers to block Congressional Democrats’ efforts to combat predatory lending. UBS later became one of the subprime crisis' top losers.  

“They are saying there was fifteen years of massive deregulation and that’s what caused the problem,”

Mr. Gramm said of his critics.

“I just don’t see any evidence of it.”

Said Mr. Phil Gramm in an interview,

“By and large, credit-default swaps have distributed the risks. They didn’t create it. The only reason people have focused on them is that some politicians don’t know a credit-default swap from a turnip”.  

Phil Gramm’s comments after the Commodity Futures Modernization Act were approved – along with other landmark legislation he had authored – by the US Congress are worthy of note: “The work of this Congress will be seen as a watershed where we turned away from an outmoded Depression-era approach to financial regulation and adopted a framework that will position our financial services industry to be world leaders into the new century,” Gramm said.  

The financial disasters that cropped up frequently (including the dot-com bubble) only went to prove how hollow these big talks were. The Dodd-Frank Act was enacted in July 10, 2010. According to the U.S. Department of the Treasury, it was “the most comprehensive set of reforms to our financial system since the Great Depression.” The act made sweeping changes throughout the financial regulatory system including new regulations for systemically important. But when the basic norms of banking are given a go-bye, things happen.

Author’s notes: The 2008 global financial crisis may be a distant memory now. The global economy may have recovered from the financial Tsunami that was precipitated post-2008. But, as Sir Winston Churchill famously said, “Those that fail to learn from history are doomed to repeat it.” Banks in the US have failed again and again, as this website1 shows. As recently as since 10 March 2023, two US banks viz., Silicon Valley Bank (SVB) and Signature Bank, collapsed. These were the biggest bank failures since 2008. (Do remember that SVB was neither a commercial bank nor an investment bank. It observed no risk management practice either.) Credit Suisse, another bank in deep crisis, reportedly mismanaged, was bailed out by the Swiss authorities who brokered the bank’s emergency sale to UBS for 3 billion Swiss francs over a weekend. ““The issues at Credit Suisse are to do with a long history of revolving doors at the top of the firm in management terms, a changing plan, and on top of a series of operational risk and control and compliance problems.”2 Sounds familiar?  

The contagion effect affected Deutsche bank, the financial stress throwing up its own fault lines. The crisis may have been contained for the time being, but history has a nasty habit of repeating itself.

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